AAPL: Time to jump in and Buy it Now?
An apple a day.
Historically, Apple Inc has been an excellent investment.
Shares have produced gains of +22% per year since the 1980s.
And +28% in the iPhone era (i.e., starting in 2007).
Unfortunately, the Consumer Electronics stock seems to have lost its mojo in 2024, at least so far.
YTD, Apple has underperformed the $SPDR S&P 500 ETF Trust(SPY)$ by a whopping 18 percentage points in less than three months.
Two reasons why Apple tanked.
(1) Hurt by Chinese demand.
- About 54% of Apple’s revenues come from its core iPhone product, fueled by demand and customers’ loyalty.
- The plus point is also its negative point as a result of over dependence on a single product.
- Since 2024, weak Chinese demand has “hurt” this product's top & bottom line.
- Not to mention, home grown Huawei’s surprise Mate 60 5G enabled launch, chipping away at Apple’s dominance.
(2) Artificial Intelligence progress.
- Apple is penalized for seemingly not being one of the main players in initial stages of the Artificial Intelligence revolution.
- I like to think this second headwind is making investors nervous as other Tech giants are speeding ahead in AI development.
Two reasons why recovery is certain.
(1) Strong business fundamentals.
- In the most recent Quarter’s big holiday period – iPhone sales grew by the most since fiscal Q4 2022. Its other product - Mac posted positive growth for the first time since that same quarter.
- Valuable services segment revenues is in double digits growth (16% & 11%) for 2 consecutive quarters. This had not happened since fiscal Q3 2022.
(2) Realistic valuation.
- In the past, Apple’s forward earnings multiple reached dizzy highs that is deemed unsustainable.
- In FY 2022, its forward earnings was 31.9x.
- As recent as July 2023, its forward earnings was 31.4x.
- Currently, its P/E is a manageable 25.9x, which suggests a PEG of 2.8x considering the 2025 consensus EPS growth rate of 9.1%.
- Although current growth-adjusted multiple is still fairly elevated, it has returned to mid-2020 levels.
Turn the beat around.
By a stroke of luck, Apple is turning the AI wheel around. (see below)
On 18 Mar 2024, Bloomberg News reported that Apple is in talks to build $Alphabet(GOOG)$ Gemini artificial intelligence (AI) engine into the iPhone, citing people familiar with the situation. (see above).
In all fairness, people familiar with the situation also “confirmed” that Apple has also held discussions with $Microsoft(MSFT)$ , opens new tab-backed OpenAI and has considered using its model.
All this comes about as Apple is preparing new capabilities as part of its upcoming iPhone iOS 18 based on its own homegrown AI models.
It is seeking a partner to power generative AI features, including functions for creating images and writing essays based on simple prompts.
It is unlikely that any deal would be announced, least not until June 2024 when Apple hold its annual Worldwide Developers Conference (WDC).
Apple is at the cross road, choose a “wrong” partner will have serious implications and repercussions.
Just for the record, Google has partnered with Samsung, opens new tab in January 2024 to deploy multiple generative AI technology products in its Galaxy S24 series of smartphones.
Need I say more?
- Final proof is to look at Apple’s YTD stock price movement.
- It began tapering from 23 Jan 2024 at $195.18 per share.
- It bottomed on 07 Mar 2024 at $169 per share.
- It is showing signs of recovery.
- On Mon, 18 Mar 2024 - it gained a further +0.64% - closing the day at $173.72.
Time to get in before Apple’s AI journey commences?
- Do you think Apple will recover lost grounds and propel higher?
- Do you think Apple will choose to partner Google instead of Microsoft ?
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